Return Ratios and Leverage The following selected data are taken from the financ

Question

Return Ratios and Leverage

The following selected data are taken from the financial statements of Pine Corp.:

Required:

1. Compute the following ratios for Pine Corp.:

Return on sales

Asset turnover (Assume that total assets at the beginning of the year were $1,600,000.)

Return on assets

Return on common stockholders' equity (Assume that the only changes in stockholders' equity during the year were from the net income for the year and dividends on the preferred stock.)

When computing percentage amounts, carry out calculations to four decimal places, but enter your answers to two decimal places; for example, .17856 rounds to .1786 and would be entered as 17.86.

Sales revenue $642,000 Cost of goods sold 356,000 Gross profit $286,000 Selling and administrative expense 100,000 Operating income $186,000 Interest expense 50,000 Income before tax $136,000 Income tax expense (40%) 54,400 Net income $81,600 Accounts payable $45,000 Accrued liabilities 70,000 Income taxes payable 10,000 Interest payable 25,000 Short-term loans payable 150,000 Total current liabilities $300,000 Long-term bonds payable $500,000 Preferred stock, 10%, $100 par $250,000 Common stock, no par 600,000 Retained earnings 350,000 Total stockholders' equity $1,200,000    Total liabilities and stockholders' equity $2,000,000

Explanation / Answer

a. return on sales = net income ( before interest and taxes) / sales

= 186000 / 642000 = 0.2897 or 28.97%

b. Asset turn over = net sales / average total assets

= 642000 / 2000000 = 0.321 or 32 times

total assets = total liabilities

c. Return on assets = net income / total assets

= 81600 / 2000000 = 0.0408 or 4.08%

d. Retorn on share holders equity = net income / share holders equity

= 81600 / 1200000

= 0.068 or 6.8 %

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